Production externalities and two-way distortion in principal-multi-agent problems
Lockwood, Ben (1999) Production externalities and two-way distortion in principal-multi-agent problems. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.527).
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This paper studies an otherwise standard principal-agent problem with hidden information, but whether there are positive production externalities between agents: the output of any agent depends positively on the effort expended by the other agents. It is shown that the optimal contract for the principal exhibits two-way distortion: the effort of any agent is oversupplied (relative to the first-best) when his marginal cost effort is low, and undersupplied his marginal cost of effort is high. This pattern of distortion cannot otherwise arise in optimal single- or multi-agent incentive contracts, unless there are countervailing incentives. However, unlike the countervailing incentives case, the pattern of distortion is robust to the precise form of the externality.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Externalities (Economics), Production (Economic theory), Information asymmetry, Incentives in industry|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Official Date:||April 1999|
|Number of Pages:||30|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
First version, August 1997; this version, April 1999
D.Baron and R.Myerson,“Regulating a monopolist with unknown costs”, Econometrica, 50 (1982), 408-415
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